jonathan: from new york city, for our viewers worldwide, i'm jonathan ferro. bloomberg real yield starts right now. coming up, investors shaking up weak data, hoping to resolve lingering macro issues, as broader credit remains, more cracks are showing in leverage loans. looking for clues beyond the next rate cut. we begin with the big issue. debating whether we have seen the worst of it. >> the u.s. is in a good spot. >> manufacturing is weak globally. >> are we going to see something as bad as 2015 in terms of a global industrial recession?

probably not. >> numbers are going to be weak through the balance of the year. >> you are starting to see some signs of bottoming out. >> if we continue to see pmi's decline maybe there is some , downside there. >> the data will continue to decelerate into the third quarter. >> maybe we get some positive news out of brexit. maybe that leads to a short-term pop in yields. >> there is no way this thing is magically over. >> we should see growth improving by the fourth quarter of next year. >> this could be the bottom, so it may get better from here. jonathan: joining me around the table, colin robertson, kathy jones, and jim keenan. kathy, let's begin with you. have we seen the worst of it? kathy: it looks like maybe the worst is over, but does not look like it gets a whole lot better. we are cheering the fact it is not continuing to decline at a fairly rapid rate, and maybe we have seen the worst of it. particularly, if we get a trade deal, we get a read the fed,

from the easing from china, and other central banks. maybe the worst is over but certainly going forward will not be strong. jonathan: jim? jim: the data is going to be mixed. there are components of the market, different reasons that we will continue to see weaker news into the balance of the year. but i think there is a variety of data that will begin to stabilize. you are seeing that already in corporate earnings, pmi data, or other things. you start to see some stabilization. i agree with kathy. i don't think this is about upside level of growth but about reducing the probability of a recessionary risk. jonathan: sometimes the information content of how a market responds to data is more valuable than the data itself. if the treasury market rallies on bad news, smaller than the treasury markets moves on good news, what kind of signal is in that? colin: it is troubling to me

because i don't support it, to your point, that we have seen the bottom, the worst of it. i think it is pretty early to think about, now there is a light at the end of the tunnel. i think the fed is still too tight. what they say next week is important. the market is setting them up to say that we will pause until after the first quarter of next year, but i'm not sure what they will say. we need to see that play out to get a better feeling of what things will look like after next week. kathy: i would say the market has incorporated so much bad news, it could not continue to react too bad news any further. we do think the fed will try to pause after this next rate cut. we think next week they will try to go on pause because the issue is it is not the cost of capital hanging over the world right now.

not the problem in europe, not in the rest of the world, in the u.s. further rate cuts may not do that much, so i think they want to pause. jonathan: has not been a problem, and yet they cut twice. they are set to cut again. what is the change? kathy: they un-inverted the yield curve, got the fed funds rate to just below the neutral rate. now they can say, we are neutral or even a little bit accommodative. jonathan: jim, your thoughts? jim: you came into the year with some cyclical downside risk associated, coming off of the 2016 rebound. then you had a tightening of the fed in the fourth quarter. i would say the central banks, including the fed have been easing throughout the year. if you look at financial conditions indices relative to economic activity, you see a pretty big divergence. collectively, all the central banks have been easing.

that should lead to a level of stability. certainly, things for downside risk associated with that, but the fed will be very reactive or even proactive to that, associated to the worry about next year. whether they stop or keep going is less important to me because the trend is that they will be very accommodative. from a stabilization of data, that is a pretty positive environment for not only credit but ultimately you can see equities melt up the rest of the year. jonathan: we will talk about equities, near all-time highs to end the week. colin, you don't think the lows are in for this year, or do you? colin: i think they could before -- they could be in for this

year, but i really like tenured treasuries at 1.80. if i gave you a range for the next six months, this would be the high. maybe we get new lows in the first quarter of next year. 1.25 to 1.75 would be my 10-year range. that is for the next half year. jonathan: what makes you bullish about the 10-year at 1.80? colin: negative interest rates, seeing a lot of new lows in countries with respect to where their 10-year rates are. we have not hit that. as i mentioned, the fed is too tight. we are where we were in june of last year. that would be the first ease. i was on the show last year and i was dead set against the last two tightenings. i think they are mistakes. i'm hoping that the fed has figured that out but i'm not sure. jonathan: kathy, 1.80? kathy: we think our value is around 1.80, 1.90. if global pmi's turn up and stop going down, that would raise our fair value.

that is a component of our estimate. our range is closer to 1.5% to 2%. jim: in the long-term ok but short-term it is a little risky. jonathan: looking at the data this week, pmi is not great. a small ray of hope in german business expectations, but beyond that, you see any signs of stabilization? kathy: again, it is not deteriorating at a rapid rate. the slowdown has slowed down, so to speak. that is somewhat stabilizing, but i don't see a lot of positive upside, a reversal in the rate of economic growth. jonathan: the data in europe has not been fantastic. bund yields this week, done absolutely nothing. the spread between u.s. and germany 10-year is closing up. approaching 200 basis points. do you think that could go even narrower, and what levels can this go to?

kathy: i think it can go a little narrower, but not a whole lot. you could see it move more, just because if you have the weight of the bund yield, that can pull on the u.s. yield, and vice versa. i don't think things are turning around in europe. things are just not getting worse. jonathan: your thoughts, colin? colin: it could still widen out, but if the bund moves further down, it will drag the u.s. with it. that is part of what is not happening right now. 10-year at 1.80, there has to be a reason. i don't think that drag is in the market. jonathan: coming up on the program, the auction block. cracks are emerging in leveraged loans as investors begin to push back. that conversation is coming up next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." i want to begin in europe, where italy sold 3 billion euros of two-year bonds. demand was about 1.5 times higher than issuance, resulting in a yield of 0.11%. in the u.s., junk-bond seeing a flurry of issuance with seven deals. almost 4 billion on one day alone. in leveraged loans, issuance to finance the acquisition of a mattress maker. 12.5% to close its deal. sticking with loans, the barclays ceo saying troubled deals are an eye-opener.

>> what we have seen recently is if you have a deal not structured properly that has some weakness to it, the market can be pretty punishing at the bottom end. jonathan: colin robertson, kathy jones, jim keenan still with me. your thoughts on loans right now? what is going on? jim: the loan market has structurally changed. you have a market that is covenant light, but the credit quality has decreased as you see more lbo's come to the market. inherently, the market is more levered. thirdly, instead of two years ago having a rising rate environment, we have an environment where libor is declining. all of those things are negative from a loan market perspective. there are couple of different stories, which are not different from the rest of the broader markets, including credit. higher quality is still doing ok. it is the lower part of the market that has bifurcated and has been pretty negative.

we continue to be cautious across the market. loans generally look more like a secured high-yield bond market than the historical bond market. there are pockets where you can find good spread and risk, but similar to the high-yield market, you have to be careful. kathy: we have not liked the loan market for some time. why are you buying loans when rates are going down? jonathan: that is my question. is this about floating rate and no appetite for it or credit risk building? kathy: both. you see the decline in credit quality, you have seen falling rates, and the covenant light business. you are seeing investors push back on it, deals not getting done. the combination -- why be in the loan market? colin: jim's point about finding the right bonds is the most critical part. in general, do not like leveraged loans, but to the point that it behaves more like the high-yield market, you have

to make sure that you are involved in the right securities. i am getting paid for the fact that the securities now look like true high-yield. jonathan: some of the issues we are seeing in leveraged loans are similar to what we saw at the back end of 2018. what is intriguing is the back end of 2018, the fixed income environment was a mess. the primary market shut down. we are seeing these issues this time around when the rest of the fixed income universe is doing decently. spreads are still tight. what does that tell you? jim: if you look at bb's in high-yield, second percentile the last year. when you look at ccc's in the high market, 75th percentile. there is a lot of bifurcation in the high-yield market. energy is way down in parts of the high-yield market. you see the same thing in loans. you just don't see the same

differentiation in returns because it is a front end spread product. in the loan market, credit risk has increased. there are certain areas of the loan market that you want to be careful of negative -- when convexity. when there is an earnings mix, it will trade like a high-yield bond. it is not about the floating rate but where you can find good spread risk, where you are finding good securities that ultimately can achieve your returns. you should be able to find a 4%, 5% return in the loan market. i would not say buy it in isolation. across the markets in credit, there is a lot of dispersion. if you can utilize different regions, you can capitalize -- on creating good income and avoiding downside risk. jonathan: kathy, build on that. kathy: i disagree, to be perfectly honest.

when and if the market turns, this differentiation will not help a whole lot. the loan market being as it is, i would say you are better off moving into high-yield than you are staying in the loan market. jonathan: looking at high-yield, we have had three scares. we got close to the tight of the year. did not even get to 4.50 this time. what does that tell you? kathy: the search for yield is still really intent. as the fed lowers rates, people will continue to pile into things that offer yield, irrespective of the quality. that is why we have been cautious on high-yield as well. jonathan: any reason to believe that demand goes away? anytime spreads start to break out toward 4.50, the buying comes back in. any reason to believe that goes away soon? jim: not at the micro level. i think those are macro factors of what could put the market into recession. if you have recession, the

broader credit spread markets will selloff. we still put a lower probability for that, but when you think about those scares that have pulled the markets down, it is really a fear of an earnings recession or economic recession. those are the things that you want to watch. again, we could talk about the loan market being negative, it is still up 6% for the year, which is a still quality return when you think about all of the negative noise. jonathan: final word, colin. colin: insatiable demand for fixed income, high-yield fixed income. not like the old days when a high-yield portfolio manager in a time of stress would be worried that they cannot reach enough liquidity. high-yield portfolio managers are now are scared, i cannot get those bonds back if i sell them. that is a huge transformation in the markets. we like high-yield. i think that will continue into next year. jonathan: coming up on the program, the final spread, the

week ahead. featuring the fed rate decision and payrolls as well. that conversation is coming up next. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." time for the final spread. over the next week, crunch time for brexit with the u.k. deadline coming october 31. wednesday, rate decision for the boj and the fed. friday, vice chairman richard clarida will be speaking just after u.s. gdp and the payrolls report. still with me are colin robertson, kathy jones, jim keenan. colin, you are looking for a

really bad number next friday. why? colin: with not a lot of support that things are getting better, the forecast will have overshot where we will be. about 85,000. i would be inclined to think that would be closer to zero than 85,000. importantly, i want to see the revisions. that would feed into my thought process that things look better than people think. jonathan: where would you be looking to see that things are not as good? colin: the revisions coming down. jonathan: nowhere else in the payrolls report? colin: that stuff is messier. i want to look at the specifics. kathy: we are looking at the consensus, closer to 75 and 85. it will be a messy report because of the gm strike, other factors. even in the hours worked, average hourly earnings, it may be hard to parse through. but it is slowing down.

employment growth is slowing down, we know that. jim: manufacturing, some things in autos, we see in the data, it will be a week number. -- weak number. that said, i would somewhat look through it. the consumer has been a positive story throughout, and even though jobs are going down, i think the consumer is still in a good place. jonathan: 75 basis point is what most people consider a midcycle adjustment. if we get another cut this wednesday, that is 75. how does the fed communicate that they may will be done without upsetting the market? jim: i think they will cut but i don't think they will say they are done. they will move toward the language of being more data dependent. we can look into the next six months, there is a lot going on between trade uncertainty, the election, that can create a variety of outcomes. they believe a lot of -- i think they will leave a lot

of optionality, but the language will be open in terms of how the market trades. kathy: i would agree. tthey will try to go on pause but i don't think that they will actually communicate that. i think they will try to communicate, we are done for now and will wait to see. i think their inclination is to stop after this, if they can. colin: i think they have put themselves in a position where they have to leave the market -- lead the market into thinking that they are still dependent, which i don't like. i would be happier if they were forecasting and trusting their forecast. data dependent does not tell me a lot. the bottom line is, i think they have painted themselves in a corner and will have to position it but we are not done or pausing necessarily. we are not sure, let's go from here. jonathan: that is a question that has come up so many times over the past few years. which data are they dependent on? colin: i think inflation and growth. they now take into consideration global growth. jonathan: you have a decent

handle on that, kathy? kathy: i don't think anybody really knows the sum of all they are looking at. they talk about inflation being below target but many measures of inflation that the fed produces are well above 2% already, so hard to narrow. is it just core pce that matters or other data? they talk about the employment situation, and some still believe in the phillips curve, some don't. they talk about the global headwinds. headwinds will be stronger sometimes, weaker in others. do we really know exactly what they are looking at? i don't think so. jonathan: jim, you understand the reaction function currently of this federal reserve? jim: there is still room and capacity. what the fed is also looking at is labor. some of the inflationary data, it is labor income that is increasing, and that can hold up aggregate demand.

this fed will be willing to run with inflationary data that is higher. they have not been able to get it there. the last 10 years, corporate profit margins have benefited. if the next 10 years you see labor inflation at the expense of profit margins but aggregate demand holds, that is a positive story. jonathan: rapidfire round. we will do it with a fed twist. is the fed one and done for 2019? yes or no? kathy: yes. colin: no. jim: yes. jonathan: no forecast of the meeting next week. does that help or hinder powell's communication effort? colin: no. kathy: helps. jonathan: expectations next year for the fed. no cuts, one cut, two cuts, or more?

colin: two. kathy: one. jim: one. jonathan: great to catch up with all of you. from new york city, that does it for us. see you next friday at 1:00 p.m. this was bloomberg "real yield." this is bloomberg tv. ♪

david: his father died when he was four, and his mother had to move the family to a rough neighborhood in the south bronx, where he didn't fit in either on the streets at night, or at an elite private school during the day. so, his mother moved him again. this time, to a military boarding school in pennsylvania. wes moore found his calling as a leader in military school, going on to johns hopkins, to oxford on a scholarship, and deutsche bank before volunteering for a tour in northern afghanistan as an officer with the 82nd airborne division.